Fine Print - October 2007

Dodging the overdraft
By G.D. Gearino

Within an eight-day stretch earlier this summer, two news reports appeared in my local paper that, when taken together, perfectly illustrated why the banking industry’s relationship with its ordinary-Joe customers is like that of a dysfunctional couple who swing wildly between love and strife. One moment, it’s all cooing devotion. The next moment, crockery is crashing against the wall and the neighbors are nervously dialing 911.

In the case of the banking industry, it can’t quite seem to decide whether it should coddle its customers or treat them as gullible marks who can be easily separated from their money. Sometimes the industry does both simultaneously, as the two newspaper articles unwittingly reveal.

The first article mentioned that Charlotte-based Wachovia had topped, for the sixth year in a row, the annual customer-satisfaction survey conducted by the University of Michigan’s business school. (Without disparaging the survey results, let me note that the first thing to pop into my mind when I read the article was a friend’s nickname for the bank: “Walkoverya.” Needless to say, she was not a satisfied customer, and she’s now an ex-customer.) Still, Wachovia was handed a gilt-edged invitation to lord its ranking over its rivals, and it wasted no time in doing so. As The Charlotte Observer noted, bank employees were gathered in the headquarters atrium and encouraged to send up a cheer that could be heard all along Tryon Street — and specifically at the nearby headquarters of Bank of America.

BofA has its own reasons to cheer, however. Another customer-satisfaction poll — that one conducted by J.D. Power and Associates — put Bank of America atop the findings for the Southeast. Thus, the state’s two largest banks had official customer-friendly stamps of approval from objective sources. But just pray you never bounce a check, at those two or any other bank.

Actually, you might be in better shape if it did bounce — instead of being covered by the bank. As the second news article made clear, banks are soaking their customers — and “soaking” is exactly the word for it — for overdraft fees totaling in the billions of dollars every year. In the past, your bank would simply refuse a check if there were insufficient funds in your account. These days, banks commonly cover the check (or debit purchase) by extending an automatic loan to you. Sure, that sounds better, but there are a couple of catches. First, the bank charges you a fee, usually in the neighborhood of $34, for each overdraft. (And, of course, you still have to repay the loan.) Second, banks have stacked the deck so that a maximum number of checks or debits are overdrawn.

If you want to understand the details of that deck-stacking, they’re available in a study by the Center for Responsible Lending, a creation of Durham-based Self-Help Credit Union. Simply put, banks routinely hold on to your deposits as long as possible before crediting them to your account, tinker with the order in which they pay your charges and often neglect to warn customers when an ATM withdrawal or debit-card purchase will cause an overdraft. The study lays out the immense scale of this transfer of wealth from consumer to shareholder, which in 2006 totaled $17.5 billion.

But the best nuggets about the industry’s effort to make as much as it can from overdraft fees are buried in the study, some in the fine-print footnotes. For instance, CRL reports that the average overdraft loan that banks and credit unions extend to customers is a paltry $27, but that in 2006 the total of such loans was $15.8 billion. (I’ll come back to this number in a moment.) Also, CRL took the trouble to calculate the interest rate on the average debit-card overdraft loan, and the result is jaw-dropping: A $34 fee on top of a $17 loan that is paid back within five days carries an annual rate of 14,600%.

But here’s the sentence from the report I like best: “Companies marketing software for overdraft lending systems promise banks that they will double to quadruple their fee income by implementing these loan programs.”

Ponder that thought a moment. Banks have developed an income stream that produces at least $1.10 in revenue for every dollar loaned to cover an overdraft for a few days. (I said we’d come back to this number: That’s $17.5 billion in overdraft fees generated by $15.8 billion in loans.) The industry’s incentive is to increase overdrafts as much, and as quickly, as possible. Bank executives might even feel that it’s their responsibility to shareholders to do so.

This is a huge public-relations problem for banks. Your teller may smile at you warmly and give your child a lollipop, but remember that the back office has a different attitude about customer happiness.